3 Stocks to Watch on Thursday: Ford, General Motors, and Facebook

Ford and Facebook impress with their earnings, while General Motors' are hurt by recalls.

Jul 24, 2014 at 10:15AM
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U.S stocks will put in another record high on Thursday if this morning's gains can be sustained, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.03% and 0.07%, respectively, at 10:15 a.m. EDT. Two companies that will give the S&P 500 a leg up today -- and presumably contribute to positive sentiment -- are Facebook (NASDAQ:FB) and Ford (NYSE:F), both of which have announced their quarterly results since yesterday's close.

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Investors liked Ford's second-quarter results, which were released this morning, sending the shares up 1.7% in morning trading. As the following table shows, Ford beat Wall Street's expectations on the top and bottom lines:

 

Actual/Year-on-year growth

Analysts' consensus estimate

Revenue

$37.4 billion

(1%)

$36.2 billion

Earnings per share, excluding special items

$0.40

(11%)

$0.36

Source: Ford, Thomson Financial Network.

This was Ford's best second quarter in three years, and it marked five years of consecutive profitable quarters following the brutal downturn that began in the fourth quarter of 2008.

The automaker's success in the second quarter was largely driven by record pretax profits in North America, but Ford even turned a profit in Europe for the first time in three years. Profit there was just $14 million -- an operating profit margin of just 0.2%, compared to 11.6% in North America. As such, Europe is essentially at breakeven for the automaker, but that is still a marked improvement considering that it had been an anchor on the company for three years.

I suspect that Ford's record performance in North America owes something to General Motors' (NYSE:GM) massive, seemingly unending, auto recalls. GM recalled another 822,000 vehicles on Wednesday, bringing its total for the year to 60 recalls covering roughly 29 million vehicles worldwide. This morning, General Motors announced its second-quarter results, which included a $1.2 billion charge for recalls that ate away more than four-fifths of its earnings per share.

Perhaps surprisingly, there is a relatively small disparity between the price-to-earnings multiple that the shares of the two automakers command, with Ford at 9.3 times the EPS estimate for 2015 and GM at 8.1 times. Furthermore, both look very cheap relative to the broad market, with the S&P 500 valued at somewhere near 15 times forward earnings. However, as The Wall Street Journal's Spencer Jakab noted, "20 years ago the price/earnings ratios of Detroit's 'Big Three' (Chrysler was still a public company) all were below 40% that of the broader stock market." At these prices, I think Ford and General Motors are decent bargains rather than screamingly cheap, but that is already not bad in a market that looks broadly expensive.

And speaking of expensive, shares of Facebook certainly aren't trading at a discount to the market. They were valued at 39 times next year's EPS estimate -- and that was prior to today's 5.3% pop in the stock. Of course, analysts will likely raise their earnings-per-share estimates after they have digested yesterday's superb quarterly results. Facebook's revenue rose 61% year on year on the back of surging mobile advertising revenue, which accounted for 62% of total ad revenue, compared to 41% in the year-ago period. I continue to think the shares are somewhat overvalued, but Facebook's growth and improved profitability could be enough to overcome that over a multiyear time horizon.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Facebook, Ford, and General Motors. The Motley Fool owns shares of Facebook and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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